Using dividends+Capitol gains in one fund to buy another?

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Trailbreaker1
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Using dividends+Capitol gains in one fund to buy another?

Post by Trailbreaker1 »

Anyone invest their dividends and capitol gains to buy shares in another fund?

I have a STAR fund in a Taxable account @ $10K. I stopped paying monthly contributions.

I recently opened up a Vanguard Total Stock Market Index Fund (Taxable account) $3K where I contribute $200/month every month from my paycheck.

I was toying with the idea of having all dividends and capitol gains made by the STAR fund go directly into the VTSMX fund....this would accelerate the contributions and growth of my index fund by 3 methods...

1). Regular monthly investments of $200
2). Any Dividends made from my STAR fund
3). Any Capital gains made from my STAR fund

Then eventually I'll get the Total Bond Index fund and do the same for that....

Anyone ever do something like this? Where one fund "feeds" another fund using only it's dividends and capitol gains?
My portfolio | Vanguard TSM index (40%), Vanguard TISM index (20%), Vanguard small cap value index (20%), Vanguard EM index (10%), Vanguard REIT index (10%).
2retire
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Re: Using dividends+Capitol gains in one fund to buy another

Post by 2retire »

Sure. I do it with my target date fund in taxable. Before I came here and learned about tax efficient placement, I had opened a target date fund in my taxable account. Once I learned how poor of an idea that was, I redirected my capital gains and dividends from it into new tax efficient funds I set up. It was pretty easy to set up on the Vanguard website. I didn't need to talk to anyone.
sscritic
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Re: Using dividends+Capitol gains in one fund to buy another

Post by sscritic »

A lot of people used to buy shares in Prime Money Market with their dividends and capital gains (you didn't think Prime Money Market was a fund, did you?), but you have always been able to use your dividends and capital gains to buy any fund you already own. I have used my dividends and capital gains to pump up my international holdings from time to time.

P.S. I don't think you can buy shares in a fund you don't already own with your dividends and capital gains.
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Trailbreaker1
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Re: Using dividends+Capitol gains in one fund to buy another

Post by Trailbreaker1 »

Oh thanks 2retire!

I'm in the same boat as you. I didn't know having a balanced fund like STAR or Target funds were bad choices in a taxable account till I came here. I figure there's no reason to contribute anymore to STAR fund but if I used the dividends and capitol gains it makes and redistribute them towards something better (more tax efficent index funds) then I can kinda "undo my wrong" in a way...

I see a balanced fund like that as another method to feed my hungry lil index funds a little bit more every month. I'm hoping that "little bit more" will eventually compound over time and end up being "a lot more".

Thanks!
My portfolio | Vanguard TSM index (40%), Vanguard TISM index (20%), Vanguard small cap value index (20%), Vanguard EM index (10%), Vanguard REIT index (10%).
The Wizard
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Re: Using dividends+Capitol gains in one fund to buy another

Post by The Wizard »

We talk at times about money being FUNGIBLE, meaning it doesn't matter if $200 comes from dividends or from your paycheck.
So I think it's almost silly to play games like this, especially if the account is tax sheltered.
In a taxable account, the smart kids tend to AVOID auto reinvesting of divs and CGDs to control their cost basis better. All such gains go to a sweep account (MM fund) from which specific investment decisions are made...
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G-Money
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Re: Using dividends+Capitol gains in one fund to buy another

Post by G-Money »

The Wizard wrote:We talk at times about money being FUNGIBLE, meaning it doesn't matter if $200 comes from dividends or from your paycheck.
So I think it's almost silly to play games like this, especially if the account is tax sheltered.
In a taxable account, the smart kids tend to AVOID auto reinvesting of divs and CGDs to control their cost basis better. All such gains go to a sweep account (MM fund) from which specific investment decisions are made...
Well, if you have a fund with a purchase fee (i.e., Vanguard FTSE All-World ex-US Small-Cap Index Fund, Vanguard Global ex-US Real Estate Fund, or Vanguard Short-Term Inflation-Protected Securities Fund), perhaps you can increase your contributions to that fund while avoiding the purchase fee by directing all dividends and capital gains from all funds in an account to one of those funds. According to the wiki, reinvested distributions are not subject to purchase fees: http://www.bogleheads.org/wiki/Purchase_fee

Caveat: I've never tried it, and don't currently own any funds with a purchase fee. But I am considering adding one, and if I do, will likely direct all capital gains/dividends to it to see if it works.
Don't assume I know what I'm talking about.
sscritic
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Re: Using dividends+Capitol gains in one fund to buy another

Post by sscritic »

G-Money wrote: According to the wiki, reinvested distributions are not subject to purchase fees: http://www.bogleheads.org/wiki/Purchase_fee
Reinvested has the requirement of re, as in back from whence it came (e.g., compare turn and return). At least that's my understanding of English.

If you look at your choices for where you send your dividends at the Vanguard website, I think you will see that Vanguard agrees with me.
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grabiner
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Re: Using dividends+Capitol gains in one fund to buy another

Post by grabiner »

I direct all my taxable dividends to my money-market fund, so that I can purchase whatever I need there. This is particularly useful in December, as my December dividends turn into my January IRA contribution, with the money already there.

Through 2006, I reinvested dividends in Emerging Markets Index, which had purchase and redemption fees at the time. In 2007, I turned off the reinvestments, because the redemption fee worked the wrong way. The fund had gone up so much that I was significantly over my target weight. Thus, if the fund went up, I would need to sell the newly-purchased shares to rebalance, and pay a redemption fee (and a capital-gains tax); if it went down (which is what actually happened), I would sell the newly-purchased shares to harvest the loss, and pay a redemption fee.

I don't have a money-market fund in my Roth IRA, so I reinvest all distributions in the same fund for convenience. I thus avoid the purchase fee on reinvested dividends in Global Real Estate, and there is no cost if it turns out that I need to sell the reinvested dividends in Value Index to buy more REIT Index.
Wiki David Grabiner
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